Microsoft Call: Online Ad Business Is Bad; Share Weakness Out Of Our Control

The audio on this call is very bad, so we may have to check the transcript later to see what we missed. Although the company’s outlook is seen as weak, Microsoft (NSDQ: MSFT) CFO Chris Liddel characterized the company’s numbers as “Relatively consistent with what we told you in April.” As for the weak share price, Liddell claimed the factors — market weakness and uncertainty over the Yahoo (NSDQ: YHOO) deal — is all out of the company’s control.

— Outlook: Liddell: The forecast assumes continuation of current trends, with some improvement in the second half of the year. Advertising component is expected to grow by 25 percent. Guidance reflects a challenging advertising environment. IR GM Colleen Heally also warned about advertisers showing reticence on spending and sub-optimal monetization. (We’ll have to get the exact details later, as we had the above-noted audio problems).

— Increased Ad Investing: Yahoo’s ad deal with Google (NSDQ: GOOG) prompted Microsoft to spend more heavily in its own advertising business during the quarter, said Liddell. In the quarter there was more spending on infrastructure, marketing, and search cash back. Microsoft is also doing more on the small acquisition front.

— Recent Yahoo Proposal: Key elements: “We are providing significant revenue guarantee.” (About $20 billion over 10 years depending on how it’s extended after the first five years). In addition to describing the basics of the transaction, Liddell reiterated a point of contention: “Microsoft’s proposal did not contain changes to Yahoo’s governance.” He also warned that he would not be taking Yahoo questions during the Q&A, though we’ll see how well they stick to that.

More from the Q&A after the jump…

Q&A:
— Econ environment: “In terms of the macro environment, it’s broadly the same as what we were expecting in April… in terms of the visibility into our products, we’re actually feeling good about our position.” But again, Liddell warns about online advertising: “The one proviso to that is in the online advertising space… it was weak in the 4th quarter. There is a direct impact and we’re not immune in the online space.”

— Competing with Google: First Yahoo question: ‘How do you compete with Google if you don’t get Yahoo?’. Liddell: We’re committed to competing with Google on search either way. But search is just one aspect of the online game. “In the search area, it’s the one area where we’re the most behind… we’re focusing particularly on the areas of search where there’s a strong comercial intent.” (So think cash back, as well as various verticals like travel — hence the Farecast buy).

— Online ROI: Analyst wondering if online revenue is online investment: “Is it likely to be more of a FY10 impact? The answer is yet.” It will take some time to see the impact of search cash back. “The online advertising area is part of the business that we think is most challenging… the online advertising area is very difficult at the moment.” He noted that the economy wasn’t having the same effect on bread-and-butter areas, like traditional business software.

— Acquisitions: “We’re going to be opportunistic.”

Call is done… we’ll check the transcript when it’s out to see what details were missed due to bad audio.